Friday, January 24, 2014

Chinese Manufacturing Slows

The driving force for mortgage rates this week came from an unexpected source. Chinese manufacturing data fell short of expectations, causing sharp losses in global stock markets. Investors shifted to relatively safer assets, helping mortgage rates end the week lower.

On Thursday, China's PMI manufacturing index dropped to 49.6, below the consensus of 50.3. Readings below 50.0 indicate a contraction in the sector. China has been an important engine of growth for the world economy, so a slowdown would have significant implications for global markets. In fact, the news from China completely overwhelmed the strong results in Europe, which showed that manufacturing in the euro zone reached the highest level since the summer of 2011. The Chinese data caused concerns about the pace of global economic growth, and investors sold stocks. This resulted in an increase in demand for bonds, including mortgage-backed securities (MBS).

This week's Existing Home Sales data showed that, despite a slowdown in the fourth quarter, 2013 reflected a year of solid gains. Over five million existing homes were sold in 2013, an increase of 9% from 2012, and the highest level since 2006. While the gains may be more modest, most analysts expect the improvement to continue in 2014 as well. The National Association of Realtors (NAR) projects a very small increase in home sales next year, but both Freddie Mac and the Mortgage Bankers Association (MBA) forecast home sales to increase about 5% in 2014.

The Week AheadNews from China likely will have an impact again next week. The next Fed meeting will take place on Wednesday. Investors will be eager to hear the Fed's views on the expected pace of reductions in bond purchases and what impact a slowdown in China may have. The most significant economic report next week will be Thursday's release of fourth quarter Gross Domestic Product (GDP), the broadest measure of US economic growth. In addition, New Home Sales will come out on Monday. Durable Orders, another important indicator of economic growth, will be released on Tuesday. Pending Home Sales will come out on Thursday. Personal Income, Core PCE inflation, and Chicago PMI manufacturing will be released on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.